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Diving Into HR Tech M&A

What's going to happen to all those remote-work unicorns who raised hundreds of millions during the pandemic, now that RTO is back and WFH is out? What's the current state of M&A in HR Tech in 2023, heading into 2024? And when will the IPO dam finally break and throw companies like iCIMS, Greenhouse, Personio and others to the public markets? All great questions, but ones Chad & Cheese aren't exactly proficient in answering. That's why we asked Jim Holzer, managing partner at Drake Star Partners, on the pod. Jim manages M&A and capital raising in the HR tech vertical for Drake Star. A must listen for anyone raising, selling or just surviving this turbulent market. Don't go into 2024 without checking this one out.


Intro: Hide your kids. Lock the doors. You're listening to HR's most dangerous podcast. Chad Sowash and Joel Cheeseman are here to punch the recruiting industry right where it hurts. Complete with breaking news, brash opinion, and loads of snark. Buckle up, boys and girls. It's time for the Chad and Cheese podcast.

Joel: Oh, yeah. It's your dog Groomer's favorite podcast, AKA the Chad and Cheese podcast. I'm your co-host, Joel Cheeseman. Joined as always the OH to my IO Chad Sowash.

Chad: Yes.

Joel: In the house. And today we welcome Jim Holzer, managing partner at Drake Star Partners. He manages

M&A and capital raising in the HR tech vertical. Jim, welcome to the Chad Cheese Podcast.

Jim Holzer: Thank you.

Chad: Drake Star.

Jim Holzer: Thanks Joel.


Chad: M&A.

Joel: This has nothing to do with the rapper Drake, right? Let's just get that out of the way real fast.

Jim Holzer: It does not, no.

Joel: Okay.

Chad: No, it's Drake Star...

Joel: Drake is not in the M&A of HR tech companies. Just everyone wants to...

Chad: That's like, it's like the death star just of M&A.

Joel: It is.

Chad: It's like they come in and they eat it all up. So, Jim, give us a little Twitter bio about Jim. What makes Jim tick.

Jim Holzer: Helping entrepreneurs and great companies achieve their goals. I've, been a banker doing software and tech enabled services banking for several decades. And, I've worked at, some of the large full service investment banks as well as specialized M&A advisory firms. And my focus today is on HR tech. You know, it's one of the most interesting segments of the software and tech services landscape. And I've been at Drake Star for over a decade. I'm a managing partner and shareholder and behind, beyond HR tech. I have a family of two grown kids live in the New York area. And it's, I am a suffering golfer. [laughter]

Chad: Aren't we all.

Jim Holzer: Aren't we all.

Chad: Aren't we all.

Joel: Jim loves to party. I can tell that just from that con...

Chad: So the HR space, why is the HR space so interesting to you?

Jim Holzer: It's been an area that has, had a lot of growth and innovation for a long time. And, you see companies of all types really being able to thrive. So from the innovative, seed stage company to the large public company, there's constantly been innovation. It's been an area also where the economy, the introtech economy, you know, despite being influenced by the overall economy, has done quite well. And you see very active, very active capital markets from the early stage capital to VC to private equity and to public markets. And, so very, very interesting space where, there's always something interesting going on.

Chad: So Talk about Drake Star, who, what is Drake Star, 100% percent tech-focused. Give us a little background around Drake Star.

Jim Holzer: Yeah. So we're, an international tech-focused investment bank, as you mentioned, but we have local presences both in North America and Europe. There's about, eight offices. We focus on M&A and capital raising only for tech companies, over a hundred bankers. So we're really actually one of the largest dedicated tech groups out there. Like many of our clients we're employee owned. So, we get the entrepreneurial spirit and some of the challenges that entrepreneurs go through, and we try to really help them, guide them on their journey to be successful.

Chad: How much is managed assets wise that, that you guys have under your umbrella?

Jim Holzer: Okay. So we're not an investment firm. We're an advisory firm. So, you know, what we do is we work on behalf of companies, really two principle areas. One is mergers and acquisitions, you know, mostly, sell side M&A. We could talk about what all that means later. Sure. As well as, you know, raising capital for later stage growth stage companies. Not venture capital, but more kind of growth equity type capital.

Joel: He's a matchmaker.

Chad: He's a matchmaker.

Joel: He's matchmaker. He makes love connections happen.


Joel: He's the Chuck Woolery, he's the Chuck Woolery of Drake Star.

Chad: He's the Tinder of Drake Star. [laughter] He's gonna tell you whether you swipe left or right. And that being said, what a great segue to my hot or not, question. I'd literally like to hear Jim from you, what type of technology are you sick of seeing pitched Joe and I could go on for days around this, but what tech are you sick of seeing pitched, and then what do you see that's hot that you don't see that's pitched enough?

Jim Holzer: Well, I think the obvious one that's over pitched, and maybe not, I'm not sick of it. I'm kind of waiting to see where it's gonna end up. But AI, I mean, everyone is talking about AI and, I was at...

Chad: Is it in every pitch that you see though? I mean, it's just like AI this...

Jim Holzer: It's AI this, AI that, you know, it's almost like, if you remember, I'm gonna date myself a bit here, but in the dotcom era, every company put dotcom at the end of their name. So no, but I, so I think, I think AI is real, but what I'd really like to see, I'm waiting for sitting at the edge of my chair is like, how are some of these solutions actually gonna take hold and add value to employers and to companies and to candidates?

Chad: So what's, what, hot? What do you wanna see more of?

Joel: You better say VR Jim, you better say VR. [laughter]

Chad: Don't do it Jim.

Jim Holzer: VR.


Chad: Don't you do it.

Jim Holzer: I think, you know, one of the, some of the things that we're seeing are, you know, I guess a couple areas like skills-based hiring. I think is, is really important. One of the issues that we could talk about that's affecting HR tech, in addition to what's going on in the economy, but there's, there's been this job gap that's, that's been going on for a while.

Chad: Oh, yeah.

Jim Holzer: And, Right. There's more, more openings and there people to fill them. Right. And, while it's been narrowing with, you know, some of the employment numbers, it's still pretty big. And, you know, maybe it's not really a jobs gap. Maybe it's really a skills gap. Like how do, how do people get the right employees, the right talent? And so we see a lot of companies, going after that. And so I think that's very interesting. And then we're seeing other areas, you know, kind of more topical in line with the economy, like contingent labor and other things like that, that are doing doing okay right now. Doing well now.

Jim Holzer: Yeah. Well, I think there's a jobs gap and a skills gap, right? I think both can be, both can be true. Where we're having kind of like a jobs gap, in let's say, for instance, hospitality. That's not really a skills gap per se, but then there are huge skills gaps in, some of the more technical spaces where we're really in need of, different types of skills. So I think that they both can exist.

Joel: Jim we're on the sort of the edge of saying goodbye to 2023. What surprised you or you didn't expect in

2023 as you look back on the year?

Jim Holzer: I think the thing that was kind of the unknown, and you know, now we're seems to have some light under at the end of the tunnel, is, you know, the impact of the Federal Reserve and their rate high campaign, it was just sort of an unknown and kind of seeing when inflation data, which is what they're tracking, when that would start to moderate. And so we now have seen some moderation and it seems like, a lot of prognosticators are saying that the Fed is kind of the end of their rate raising cycle, and that, you know, and that should be better for the economy. The question is how long do rates stay high? So that, I think that was kind of the big unknown. Yeah that I was been waiting to understand like, when would that, when would we see that kind of the light at the end of the tunnel?

Joel: And what's your read on inflation rates? And, you know, money isn't free anymore because we had a parade of unicorns from, let's call it 2020 to 2022. The deals, the oysters, the velocity globals, the remotes got a lot of money. What's the state of those companies right now as they look into 2024?

Jim Holzer: You know, if you look at venture as a whole, there is definitely, you know, a lot of money thrown at companies and, things kind of went too, maybe too far in one direction. And now what's happening is, you know, it's a lot, a lot harder to raise capital for the, some of these companies. And so there's a big emphasis on profitability and controlling your own destiny, being cashflow positive. I mean, it's, you know, with the SaaS model, you know, when that, as it's getting established, you can kind of invest in that and get some pretty, pretty amazing growth. But you also have to kind of look at like, how are we as a company, you know, what's our cash flow situation? What's our cash situation? So there's a big emphasis on that. And we've seen the market change.

Jim Holzer: You know, everyone talks about the rule of 40s and, you know, which is really the sum of a company's growth rate and their profitability, their free cash flow margin. And so what's happened, there's been a massive correction in the public markets. And what you're seeing now is, you know, companies that maybe traded companies with, let's say a 20 to 30% growth rate and a 10 to 20% free cashflow margin will trade higher than one with a greater than 30% growth rate, or a less than 10% free cash flow margin. And so that's kind of a, a sign that the market is, you know, growth is still very important, but profitability is becoming important as well.

Jim Holzer: And you see that in the venture marketplace, whereas the investors wanna see, you know, more, more disciplined, and the companies that were on that old model you were talking about before, some of them it's more difficult. And we've seen, you know, even with some of the IPOs that have happened, we've seen some unicorns, you know, go public at a lower valuation than their last round.

Joel: Not in our space, they haven't, you've seen Instacart and some others.

Jim Holzer: Yeah. Not, not yet. There haven't been any HR tech ones, but just, you know, the whole, the whole kind of, you know, software.

Joel: Put a pin in the IPO question. Chad, what do you got for it?

Jim Holzer: Okay.

Chad: [laughter] So how will all of that money affect a lot of these big brands? I mean, because there is a thing, as we say on the show, as taking too much money.

Joel: The other dynamic, Jim, also, a lot of these companies got a lot of money on the premise that the world was gonna go remote and never go back to the office. And we're seeing that they are going back to the office. So to me it's like a double whammy for these companies in terms of trying to make it your thoughts?

Jim Holzer: Yeah. Well, and Venture always, you know, had the requirement that when you take that money, you have a higher hurdle for exit because the investor, you know, especially those early stages, they need to get, for their model to work, they need to get 6, 7, 8X returns. And so, as an entrepreneur, you're signing up for, to grow, to become a much bigger company. And so for some companies that, you know, that's great. If you can become a large business, you know, perhaps large enough to go public or just kind of keep on growing, you know, that could work, but it doesn't work for everybody. And, if you get too caught up in raising lots of money and, higher and higher valuations, then it's just gonna make it harder for you to have a good exit and return for everybody, all the stakeholders.

Chad: So let's talk a little bit about the key data points for, acquiring or M&A from your side of the house. As founders that are out there today. They obviously would love to hear from a guy like you to know what the key data points, obviously profits, growth was big. Now it's more, you know, focusing on discipline and profits. What do you see now, and then also with the landscape down the road, is there going to be other points that you think are more important, than, you know, just pure growth.

Jim Holzer: Every company's situation is unique, you know, so it's really a combination of all those factors. What you wanna see is a company that is growing and gaining traction in their market with a business model that makes sense and can generate returns. So, you know, what does that mean? It does mean profitability companies, companies can trade off profitability for growth. So a lot of attention when you're selling a company or raising capital is on things people call the SaaS metrics. So what is your gross in net retention, what is your LTV to CAC? What is your payback for CAC? And what do your margins look like? What's your channel strategy? Is it direct? Is it go, Is it partner? So how does all that work together?

Jim Holzer: And then, you know, strategically, how does that fit in an ecosystem? Are you in a category that has a big enough TAM that you could be, a product onto itself? Or are you kind of a feature of some other bigger company that eventually will get consolidated? So we look at all that, you know, and the story is always unique based on the company and the segment, and there's not really one size fits all. It's really, you know, building a healthy business, you know, having, you know, a strong team. Teams are really important in technology.

Jim Holzer: You know, buyers will, will look to buy a company for a position in the market to fill a product hole, but also to get talent. And a lot of our deals, the team on the company that's getting sold is a, they actually have, you know, enhanced career opportunities and a better opportunity to be part of something bigger, you know and join with other, you know, like-minded colleagues.

Chad: Are you seeing a lot more of that, where it's more of an acqui-hire? Yes. They're getting the tech, yes. They're getting whatever portfolio, what have you, maybe filling a features some of a gap that they have within their current organization. Is it mainly the talent? Because I mean, that, that in itself is a pretty big buy, but that talent can also walk out the door. So I mean, there's a huge risk for a lot of companies right there, isn't it?

Jim Holzer: Yeah. So we're not really that involved in acqui-hire deals. They tend to be like some of the smaller deals, you know?

Chad: Okay.

Jim Holzer: Perhaps we talked about some of the, you know, challenge venture back companies, you know, some of them could probably get acquired and maybe, the team might be an interesting, driver. But, you know, in a lot of our deals, it's kind of a combination of the business plus the talent is how I would say it. It's not, it's not just the talent.

Chad: Gotcha. Gotcha.

Joel: Let's jump into IPOs. Jim. We've been hearing for years the iCIMS, the greenhouses, were going public. The pullback from, you know, after releasing the S1, is the dam gonna break in '24? Are companies just gonna back away from all the IPO talk. I mean, Personio is one that, over in Germany that's now coming to America, they're talking about IPOs. I mean, HiBob is raising a ton of money. The IPO has to, the dam has to break, right. Jim, what's your take?

Jim Holzer: So, yeah, I mean, as the economy improves, as interest rates moderate as the stock market recovers, you're gonna see more IPOs. And you know, that that should be, I'm expecting a better IPO market in 2024. You know, whether or not some of these big companies, you know, iCIMS Personio, HiBob, etcetera, the ones you mentioned, will get out, you know, is gonna be more, it'll be market specific. It'll be a better market environment, but also company specific. So it's gonna depend on where they are. You know, there are, there are also, you know, opportunities, for some of these companies to do more of a private equity type transaction to get an exit. You know, obviously iCIMS has, you know, several private equity firms in there. But obviously as you get bigger and you, as we talked about earlier, and you have, you know, really high valuations, it becomes harder to do some of those.

Chad: So from the Drake Star HR tech report, let's go ahead and jump into that for, and this was just released when, Jim, this is pretty new stuff.

Jim Holzer: Yeah. It came out last week. We do a quarterly, you know, HR tech report. We look at different sectors. We look at M&A activity, financing activity. Yeah. We try to spotlight, we, a lot of times we'll invite a guest and we'll try to spotlight, you know, an area that's interesting.

Chad: So I think the thing that you said earlier that I thought was incredibly interesting, that is that there's innovation in this segment. And there is, there's no question. But without adoption, that really doesn't matter. And from...

Jim Holzer: Absolutely.

Chad: From your data, 63% of HR leaders intend on using generative AI to improve efficiency. Why only 63%? And to you, is that like a downer? I mean, because this is a large market and only 63% of the market is looking to actually go into what everybody's talking about, which is AI, and it's on every one of those fricking presentations that you see out there.

Joel: And we wonder why CareerBuilder is still in business.


Jim Holzer: Yeah. I mean, I don't know why it's only 63%. You know, perhaps some of the companies have their heads down, they were focused on what they were focused on and they're are not gonna go after the AI hype. But I think, you know, really, it'll be interesting. As I said earlier, I don't know if you all have any predictions, but how will it, how will this settle out and where will we see adoption? Yeah you're right. There's innovation, but also you need the adoption for it to work.

Joel: Oh, we always have predictions, Jim, and what the market says about our predictions.

Joel: 60% of the time, it works every time.


Chad: And then also on the business side of the house, 37% of HR leaders are exploring AI to cut costs. You would think that that would be a much larger, I mean, especially when you're talking to the business, right? If you're trying to look for budget, the way to say that this budget's gonna help is it's here to cut costs. So do you think that HR themselves need to be schooled on what the really the aspects of business are that they should be focusing on? Because this 37%, that should be 99.9%, right?

Jim Holzer: Yeah. HR and the technology landscape, we constantly see automation to improve processes, improve compliance, you know, you name it. And so yeah, I think it's pretty obvious that, the AI should be a big part of that. So yeah. I'm kind of, I'm also wondering why it's only 37%

Chad: Yeah. RPA AI, whatever it is, I don't care. And I almost think, and tell me what you think is you start to look at all these presentations and you're dealing with these startups that, the process efficiencies are built in. And that's what many HR companies are looking for. They're not looking for themselves to create AI, and/or to adopt. They're just looking to have this baked into their newest platform.

Jim Holzer: Yeah they're looking to have it baked in. You know, some of them, you know, board members might say, well, what's our position on AI? We need to have a position on AI. And so, you know, maybe that's why you're seeing a lot of hype 'cause all of a sudden the dam broke and people are saying, yeah, we have to do something with AI.

Joel: Jim. There's been layoffs recently, most notably LinkedIn laying off some 670 or so people, we talked about Oyster, another sort of unicorn from a couple years ago that's laid off a lot of folks SeekOut, I think, recently, so I could go on and on, but how does someone in your shoes look at layoffs? Does, do you say weakness in the business? Do you say smart business decision? Do you say automation is coming in? Talk about how you look at layoffs from your point of view.

Jim Holzer: Yeah I mean, the layoffs obviously are a sign that the business is not performing up to expectations whatever the budget is. And they're making adjustments for it. I think again, it's kind of case specific and what's the magnitude? Are they, is it large scale layoffs or is it, you know, some pruning, what have you. But, you know, clearly, you know, we talked about the funding market's changing, and that's one of the tools that companies and management will use to respond to that.

Joel: When you say funding has changed, money isn't free anymore. Interest rates are higher. And some of the big raises that we've talked about on the show, HiBob, Harry, Employment Hire recently, these are pretty big rounds. Do you look at those and say, those are really healthy companies because to be able to raise money in this environment, you really have to have your act together. It's sort of like the real estate market from '06 to '16. Like, you had to have good credit, you had to have a job, you couldn't just get money for free. Do you look at these rounds now and say, these are really healthy companies because the hurdle they have to clear is much higher than it was in in 2020?

Jim Holzer: Yeah, I mean, the companies are performing to raise capital's environment. You have to be performing. And, you know, the other thing that's, you know, implicit, you have to maybe look a little deeper into the round. These firms that have investors, the investors, you know, provide a level of support. So when they, when a brand name investor comes in, they're not just necessarily coming in for that round. They're making a commitment to support the company. So you need to look at did they raise more capital? Are there new investors involved? What is the valuation compared to the last round? That's not always, all that information isn't always public, but I mean, that would, you know, sort of indicate how they're performing. But I'd say yes, in general, you know, companies like HiBob and others that are raising capital are, you know, likely performing.

Chad: I've got two quick questions to round this out Jim. So first and foremost, we're seeing a lot of companies who've taken a lot of money who have an overinflated TAM. And these are what I like to call, I don't know, lies. [laughter] I mean, you've got all of this bloat Of companies who are marketing that they have this vaporware. Now it could be aspirational, there's no question, but it seems incredibly undisciplined to me. And I would like to know what you guys see when you see these companies come in, with large valuations, but they're at a TAM, that there are no way that they can actually cover that. That's question number one. What do you guys do? Is this an advisory scenario where you have them like close and become more disciplined? What's the key there?

Jim Holzer: So, yeah, I mean, that's a question an investor or buyer will ask is what your view of the TAM? And we look at that and we try to assess is it credible or not, and advise them like maybe we should change our assumptions a bit or, maybe it looks good. So, yeah, so it's an important thing and it's as important as any other aspect of the company. You need to, we need to present it in a credible way and we know what investors and buyers look at. So before we take a company to market, we spend a lot of time looking at all those different aspects, Tam being one of them, and trying to explain it in a credible and transparent way.

Chad: Gotcha. Gotcha. So my last one's about founder deal breakers. So do you have any stories, anonymous stories?

Joel: You can name names Jim.

Chad: If he wants to. That's entirely up to him, but I wanna hear some stories, some founders like Antics are really bad decisions that just stop the deal dead.

Jim Holzer: I remember once I did a deal and, it was a recap where the founder was going to, take some money off the table and get capital to grow. And he never told us that he was being audited by the IRS.

Chad: So ouch.

Jim Holzer: When we were like very close to closing, all of a sudden he gets a very large fine and penalty from the IRS and needless to say that, that killed the deal.


Joel: Wow. [laughter] that escalated quickly.

Chad: Okay. That's a good story.

Jim Holzer: And it's...

Joel: Jim, my question isn't nearly as entertaining, but I asked you to look back at '23, you mentioned IPOs in '24, but gimme some predictions for '24. As we head into a new year, what do you expect to see in the M&A space and investment space?

Jim Holzer: So, yeah, I think '24, and we're starting to see this happen already just based on, you know, discussions we're having and new clients that we're taking on. I think M&A is gonna be stronger. There has been, even in spite of the turbulence this year, there has been a good demand, strong demand for good companies that are performing. By definition, there's less of those.

Jim Holzer: And you have, you know, strategic buyers that have growth plans and have capital that wanna make acquisitions. You have private equity that wanna make acquisitions. So, you know, even though '23, like our, the quarterly M&A volume is probably at 20% less than '21, which is a high watermark. There's still like 34% more deals in 2019. And so we're kind of, we're expecting that to continue the fundraising market on private placements has been more challenged.

Jim Holzer: There's been more of a decline there, you know, both, you know, versus '21 and 2019. I think as things settle out, companies may be adapt their business models to, "the new normal". I think we'll see some improvements there, but I'm expecting probably a more active M&A market and probably an improving financing market, but still may take a while for things on the financing side to really heat up.

Joel: Are there gonna be a lot of clearance rack sales? 'Cause I think that that's what everybody's looking for?

Jim Holzer: I mean, there could be, but the companies that were challenged and have issues on capital, they wanna sell and they need to sell, but buyers are still pretty careful. So some of them might happen, but, the buyers out there that are active and driving the market are, want good businesses that don't necessarily wanna take on something that might be risky or, you know, maybe heading in the, continuing to head in the wrong direction. So I think there'll be a lot of companies that will see, you know, that are troubled, that will seek a sale. The question is how many of them will actually get done?

Joel: Give me one company that'll IPO in '24.

Chad: Drum Roll please.

Jim Holzer: Good question.

Chad: Just a prediction Jim, we're not gonna hold you to it. It's okay.

Jim Holzer: I'm not sure.


Jim Holzer: Is that okay?

Joel: Oh, come on Jim.

Chad: I'm gonna call step star. I'm gonna call step star.

Joel: Come on Jim. [laughter] Alright, that is, that's Jim Holzer, everybody from Drake Star Partners, he's a managing partner. Drake, for our listeners who wanna know more about you or maybe some startups out there that are looking for money or wanting to sell, where would you send them?

Jim Holzer: Send them to our website, or to my LinkedIn profile.

Joel: Easy enough. And if you ever wanna talk about '80s basketball, collegiately. Jim's your guy. If you know in the green room, Chad, that is another one in the can, we out.

Chad: We out.

Outro: Wow. Look at you. You made it through an entire episode of the Chad and Cheese podcast. Or maybe you cheated and fast forwarded to the end. Either way, there's no doubt you wish you had that time back. Valuable time you could have used to buy a nutritious meal at Taco Bell. Enjoy a pour of your favorite whiskey. Or just watch big booty Latinas and bug fights on TikTok. No, you hung out with these two chuggle heads instead, now go take a shower and wash off all the guilt, but save some soap because you'll be back like an awful train wreck. You can't look away. And like Chad's favorite Western, you can't quit them either. We out.


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